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CA Intermediate · Financial Management and Strategic Management · Treasury and Cash Management

Aarav Traders receives cheques totalling Rs 20 lakh a month and a lockbox arrangement with its bank reduces the collection float by 3 days. Annual cost of the lockbox service is Rs 1,20,000 and the firm can invest released cash at 10% per annum. Take 360 days a year and uniform daily collections. What is the net annual benefit of the arrangement?</br>

The arrangement produces a net loss, not a gain. Cash released is 3 days of collections of about Rs 66,667, i.e. Rs 2,00,000, earning Rs 20,000 at 10%, which is far below the Rs 1,20,000 annual cost, leaving a Rs 1,00,000 loss.

  1. ARs 40,000 loss
  2. BRs 20,000 lossCorrect
  3. CRs 20,000 gain
  4. DRs 1,20,000 gain

Explanation

Annual collections = 20 x 12 = Rs 240 lakh; per day = 2,40,00,000/360 = Rs 66,667. Cash released = 3 x 66,667 = Rs 2,00,000. Interest at 10% = Rs 20,000. Cost is Rs 1,20,000, so net = 20,000 - 1,20,000 = Rs 1,00,000 loss. Hence none of the stated amounts match; recomputation shows the loss is Rs 1,00,000.

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